In March 2013, the Centers for Medicare & Medicaid Services (CMS) released a memorandum announcing that beginning April 1, 2013, payments made to Medicare Advantage Organizations (MAOs), Part D sponsors, and other programs were being reduced by 2 percent due to the Balanced Budget and Emergency Deficit Control Act of 1985. The payment reduction, referred to as sequestration, is applied to the net capitation payment (NCP) made to the plans, including MAOs. Therefore, Medicare rates and fee schedules remain unaffected by sequestration.

Following the implementation of sequestration, hospitals nationwide noticed MAOs reducing hospital reimbursement by 2 percent, essentially passing the payment cut on to the hospitals. Many hospitals with contracts with MAOs that based reimbursement on Medicare rates disputed the MAOs’ actions, because sequestration left Medicare rates unaffected. In August 2013, the American Hospital Association (AHA) wrote a public letter to Marilyn Tavenner, the CMS administrator at the time. AHA sought clarification from CMS on how sequestration affects hospitals that have contracts with MAOs. AHA specifically stated that it was concerned that many MAOs were passing the 2-percent reduction along to hospitals without regard for the terms of their contracts with those hospitals. AHA requested that CMS provide additional guidance to MAOs to explain that Medicare rates have not been altered, and thus, if a contract with a hospital bases reimbursement on Medicare rates, then the 2-percent reimbursement cut should not be passed along.

CMS responded to AHA’s letter in April 2014. The agency indicated that it agreed that sequestration did not change the rates or fee schedules in the Medicare fee-for-service program. CMS included the following frequently asked question in its response to AHA:

Question: Does the 2-percent payment reduction under sequestration apply to the payment rates reflected in Medicare FFS fee schedules, or does it only apply to the final payment amounts?

Answer: Payment adjustments required under sequestration are applied to all claims after determining the Medicare payment, including application of the current fee schedule, coinsurance, any applicable deductible, and any applicable Medicare secondary payment adjustments. All fee schedules, pricers, etc., are unchanged by sequestration. Only the final amount is reduced.

However, CMS also noted that it is prohibited from interfering with the payment arrangements between MAOs and hospitals. CMS reiterated that the impact of sequestration on hospital reimbursement is governed by the contract between the hospital and an MAO. Therefore, if a hospital’s reimbursement has been cut by 2 percent by an MAO, the hospital should review its contract with the MAO to determine the appropriateness of the payment reduction and the necessary steps to take to address it.

Upon review of contracts with MAOs, it is important that hospitals review the entire contractual document, including any amendments and appendices. This is because while the portion of the contract that governs reimbursement may set reimbursement on Medicare rates and/or fee schedules, other portions of the contract may in some way limit the hospital’s ability to challenge the MAO’s actions with regard to sequestrations. For instance, the contract may set a limited time frame for the hospital to raise an issue with payment methodology, or it may include a broad clause that allows the MAO to pass payment cuts from CMS on to the hospital.

Following a review of the contractual language regarding the MAO’s actions, the hospital should review the contract with the MAO for instructions regarding dispute resolution. Many contracts will require the hospital to engage in an internal dispute resolution process before either requesting binding arbitration or filing an action in court. A clause of a contract may provide that if the parties cannot resolve or settle a dispute by mutual agreement, then it will be resolved by binding arbitration. In these cases, if the hospital disagrees with the MAO’s actions regarding sequestration, the hospital should reach out to the MAO to attempt to resolve the issue through mutual agreement. If that process fails, binding arbitration would be the next step. However, it is essential that the hospital very carefully review its contract with the MAO in order to accurately determine the hospital’s contractual rights and the appropriate steps that must be taken to effectuate those rights.

It is important that hospitals evaluate and analyze the contractual language and the steps prescribed to resolving a contractual dispute. A careful review of the MAO contract and the appeals process available to hospitals will help any individual hospital determine if it is entitled to retain full reimbursement from MAOs.

About the Authors

Andrew B. Wachler is the principal of Wachler & Associates, P.C. He graduated Cum Laude from the University of Michigan in 1974 and was the recipient of the William J. Branstom Award. He graduated Cum Laude from Wayne State University Law School in 1978. Mr. Wachler has been practicing healthcare and business law for over 25 years and has been defending Medicare and other third party payor audits since 1980. Mr. Wachler counsels healthcare providers and organizations nationwide in a variety of legal matters. He writes and speaks nationally to professional organizations and other entities on a variety of healthcare legal topics.

Jessica Forster is an associate at Wachler & Associates, P.C. Ms. Forster dedicates a considerable portion of her practice to defending healthcare providers and suppliers in the defense of RAC, Medicare, Medicaid and third party payer audits. Her practice also includes the representation of clients in Stark, anti-kickback, and fraud and abuse matters.